| The Four Ways of Business |
| Invention Development Advice - Business Planning | |||
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When you talk to people who have gone into business for themselves, they will give you a wide range of reasons: to do something for themselves; to work with their partner of other family member; because they were bored; they wanted to make money; they wanted to build an asset for their retirement or for their children; the were made redundant or feared redundancy; the onset of ‘mid life crisis’; and so on.
In most cases, the decision to buy or start a business was influenced by more than one of these factors. However, more important than the reason of why you chose to get into business, is what you expect to get out of it.
Through my work with many small business owners, I have divided the main purposes or ways of being in business into four categories:
Hobby Business A hobby business provides a secondary income, and relies on an outside or primary income to support the business owner. Many people in full time employment have a hobby business on the side, providing a useful ‘top-up’ financially, as well as access to significant tax advantages. Other people running hobby businesses may be care-takers, superannuants, beneficiaries or even minors.
Building or Buying a Job This is often the choice of people made redundant from long term employment or others who are finding it difficult to enter or re-enter the workforce. The primary motivation here is often long term security and stability, and operators often intend to ‘stick it out’ to retirement.
Tradesmen of all types, who seek to develop a business based on their skills, will often build a business of this type or purpose. It is common to find that operators in this area don’t actually want or understand a ‘business’ – they really want a ‘job’.
Lifestyle In these cases the nature of the work is the attracted. Many artists, musician, outdoor types and health practitioners build a business of this type, often regardless of income levels. The approach is often ‘I’d still be doing it even if I wasn’t being paid’ and again, long term connection with the activity is usually the goal.
Growth Business A Growth Business is quite different from the first three. The intention here is to build the business to a predetermined target level (taking into account income and return on investment) and the decide whether to stay in or sell out (wholly or in part). This requires very definite planned steps – and a very decided attitude of mind. The owner has to develop and plan an ‘Exit Policy’ from the very start of the business: that is, you plan to work your way OUT of the business.
This model is the only one that fits a key definition of business, which is that ‘a true business must be capable of running without the owner’. An emotional commitment to ‘letting go’ is absolutely vital for a successful transition to a Growth Business.
Matching Personal and Business Goals The importance of understanding which of the categories you fall into becomes obvious when you realise that each of the four ways of business has its own issues and features. The whole legal structure and shape and development of your business depend on the correct match of your personal goals to your business model.
Put simply, if you are in the wrong ‘way’ of business then your business won’t make you happy.
Common Legal Structures How are the different business ways legally structured? The Hobby Business will usually be in the form of a sole trader. It may not be GST registered, and usually consists of owner/operator with no staff.
The Build Yourself a Job Business will again often be a sole trader – forming a legal partnership with a spouse is often a favoured option to generate some tax advantages. It will almost always be GST registered, and may well end up employing staff.
The Lifestyle Business has a wider range of common choice – trusts, cooperatives and even incorporated societies and often represented in this category as well as usual forms of sole trader and partnerships. People of like mind and like interests may choose to club together to form both a mutual support group and to share expenses and development and promotion costs. Artists and potters cooperatives would be obvious examples of this type. Some may be GST registered, others not.
The Growth Business will almost always be a Limited Company. This structure gives a convenient and easy way of splitting or separating our parts of the business as it allows other to buy in conveniently and easily. The entity is easily valued, with clear lines of ownership and title to the assets and profits. The Growth Business will always be GST registered, and will have sufficient number of shared allocated at start-up to allow for future growth.
Financial Structures The correct financial structuring of the business is equally important as the legal structuring. Although people are understandably disappointed and upset if the banks play hard to get with the business purchases, lack of clarity on the Four Ways of Business is often the root cause.
The Hobby Business is usually financed from the primary income. It is very unlikely that any external source would find a Hobby Business an attractive investment, as there usually isn’t enough left over to repay debt.
Banks are usually happy to finance such Build Yourself a Job businesses, providing the borrower is able to provide some form of security – a loan against a property is common.
Lifestyle Business is perhaps not surprisingly hard to fund – after all, would you fund someone else’s lifestyle? Approaches are often made to Government sources and local body funds and resources cover the start up of many groups. Individuals are unlikely to attract finds from banks unless they can offer substantial security.
A Growth Business can almost always be relied on to find a backer, if the market research is solid and a good and realistic cash-flow shows real potential in the product or service. If the idea stacks up – you will find the money somehow!
Be Clear On Your Goals In order to ensure your ambition, a good point to start is creating a very clear, written set of personal goals. What is the vision for both the business and you personally?
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